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Tax Cuts Don’t ‘Starve the Beast’

April 4, 2006 10:10 pmApril 4, 2006 10:10 pm

Liberals generally believe that conservatives support tax cuts mainly out of selfish personal interest. In truth they have a more noble motivation—though liberals don’t like it any better. Most conservatives believe that the best way to downsize government is to take away its allowance, as Ronald Reagan once put it. In other words, tax cuts will lead to spending cuts.

This is a theory I once subscribed to. Back in the days when people cared about federal budget deficits, there was a case to be made that intentionally increasing the deficit by reducing revenues would put downward pressure on spending. Today, unfortunately, the evidence seems to point in exactly the opposite direction.

At the time that I drafted the Kemp-Roth tax bill, in 1977, the Republican Party still believed that budget deficits were evil. Republicans would often even support tax increases, such as in 1969, to balance the budget. But they came to believe that higher taxes only encouraged higher spending—until a politically intolerable deficit emerged, at which point they would again be pressured to support tax increases. Eventually, Republicans like Newt Gingrich would charge that their party had become the tax collector for the welfare state.

Back in the 1970’s, it wasn’t necessary for Republicans or Democrats to raise taxes explicitly; the tax code did it for them. Because the code was not indexed to inflation, taxpayers were often pushed up into higher tax brackets when they received a cost-of-living pay raise. Their purchasing power would not increase, but the tax system would treat them as if they had gotten a real increase in income. It was commonly estimated during that time that federal revenues rose 1.6 times faster than the rate of inflation.

With inflation at double-digit levels in the late 1970’s (and with economists generally believing that it would take many years for those levels to fall), projecting balanced budgets was easy. Theoretically, the government could slow the growth of spending just a little, and revenues would catch up. In practice, of course, revenues did not catch up—because spending rose too fast—so actual deficits never shrunk.

This had a profound effect on conservative thinking. Historically, conservatives had viewed deficits as immoral because they allowed the government to spend more at the expense of future generations, because deficits were viewed as inflationary, and because they led to an increase in the size of government. But the failure of balanced budgets to emerge despite large tax increases led conservatives to question whether balancing the budget was a worthwhile goal.

At this point, in the late 1970’s, a few conservatives like Jack Kemp, who was a congressman from Buffalo, N.Y., said to heck with the balanced budget. Let’s just cut taxes and see what happens. Mr. Kemp predicted that economic growth would rise so much that revenues might not even fall.

Most mainstream conservatives didn’t buy Mr. Kemp’s strategy right away. But after Californians passed Proposition 13 in 1978, they could see that tax cutting was politically popular. They had also learned the hard way that trying to cut spending at a time when revenue was rapidly rising was politically impossible.

So Republican Congressional leaders and conservative economists like Alan Greenspan and Herb Stein came to support tax cuts as a strategy to force spending cuts. David Stockman, who was a congressman from Michigan and later director of the Office of Management and Budget under President Reagan, was among the most enthusiastic converts to what came to be called the “starve the beast” theory of taxation.

This led to a coalition of three groups — supply-siders who thought tax cuts would increase revenues, libertarians who were in favor of all tax cuts, and traditional conservatives who wanted to cut spending and balance the budget. Ronald Reagan, embodying all three perspectives, unified the Republican Party around the idea of reducing tax rates without specifying any complementary spending cuts (which would have cost him support among those who might have lost government benefits).

In the 1980’s, there was some evidence that the starve-the-beast theory worked. Almost every year, budget deals cut spending a bit, although tax increases were always part of the mix. Ultimately, President Reagan supported tax increases that took back about half of his 1981 tax cut.

Nevertheless, the idea that tax cuts would downsize government became Republican dogma. Today, most Republicans in Congress view tax cuts as the only thing needed to reduce the size of government—and the connection between deficits and spending seems forgotten. Now Republicans raise spending and cut taxes at the same time.

As a consequence, the old starve-the-beast theory has been turned on its head. Economist Bill Niskanen of the Cato Institute has found that tax cuts now actually lead to spending increases. This suggests that higher taxes would reduce spending.

I think that higher taxes are inevitable, as I have explained in previous posts. If conservatives recognize this reality, perhaps they can force meaningful spending cuts as their price for supporting them. In any case, the starve-the-beast theory is as dead as the dodo.

I agree, I think higher taxes are inevitable, mainly because people don’t practice good ‘curb your politician’ habits. We didn’t get to a 9 trillion national debt cap by accident, we got there either by voting for it, or failing to vote against it, or worse yet not getting invited to THAT vote at all, any way it works out, washington has diahhrea-of-the-wallet, and it needs to be fixed. Alternatively, we can just wait for China to foreclose….

You provided the missing link in the starve-the-beast theory. I could never understand why starve-the-beasters were willing to feed the gluttonous beast of interest on the national debt, i.e., feed the beasts of China, Europe, and the nations that hold the notes on America’s debt, while trying to cut spending at home. Last year, we spent about the same amount on servicing the national debt as we did on education for the entire country. Starve-the-beast without a balanced budget requirement is like letting your own children go hungry while feeding those of others. But why starve the beast in the first place? Don’t we all enjoy good roads, the internet, the safety net of social programs? Aren’t we all happy when grandma can pay for her medication? Isn’t our national family better off when the minimum wage is high enough so that fellow citizens can afford to live decently, no matter whether they are writing software, serving coffee, checking me out at Wal-Mart, or creating art? Grumpy slogans like starve-the-beast may roll off the tongue easily, but they do a huge disservice in that they negate the enormous amount of good that a vigorous, thriving, democratic government can do.

Almost inevitably one-sided economic fantasies fail. Businesses can only lower prices so much to increase demand (the elasticity principle) before, at some point, marginal costs can’t follow and total operations go into loss. At some point, financiers stop financing a perpetual, loss-generating concerns. National economies are not quite like that, but, at some point, that important difference will fade. In truth, the “super stimulus” of an increasing rate of tax cuts and historically high, and increasing rate of spending, which has been the Bush Administrations de facto policy, looks in aggregate like something that Keynesian economists would have fashioned (though not necessarily sectorally or demographically). It is no surprise that people are beginning to compare the binge in deficit spending to the FDR era, but, sadly, without comparable rhyme or reason. One last point: looking for “policy” in the Bush-Republican model is a waste of time. Look solely for “politics” because only pure politics can have produced such irresponsible, short-termism.

Bruce, you’re doing a fine job of call bluffs these days. Your being an independent conservative is doing us all a lot of good!

Bartlett’s account is useful and accurate even if I prefer a “high service, high tax” system. He fails to note fully the huge political price paid by political leaders who acted responsibly to curb the deficit. President G.H.W. Bush accepted modest tax increases in 1989-90 to curb the deficit and radical Republicans were furious: it may have contributed to his defeat in 1992. President Clinton and the Democratic Congress raised revenues (modestly) in 1993 and were punished severely in 1994. Those fiscal reforms contributed to the ensuing prosperity of the following six years. Had Greenspan acted responsibly to curb the stockmarket bubble after 1997, it might have lasted longer.
Not only have our political leaders failed to act responsibly, but those that have are often punished by voters.

I am a 34 year old true blue Democrat, and there’s not a single word in this article that I disagree with. My generation of Democrats, near as I can tell, are committed to fiscal discipline. For us, life was never as good as it was in the late nineties when the government was running surplusses. And I can’t for the life of me figure out why Democratic candidates don’t hammer on this issue daily.

The one major element that you left out of this discussion, of course, is defense spending, which is the largest chunk of the federal budget pie. For Republicans, spending on the military is not just good politics, it’s a way of rewarding their base, because the majority of military employees are Republicans. Every other industry in the United States has had to become leaner and more efficient when it comes to costs. Meanwhile, the U.S. military budget (and the amorphous Homeland Security budget) has ballooned under the cover of patriotism.

We will never get the budget deficit under control until we ask Congress to be as disciplined with the military budget as the military commanders are in the field.

Any function can be performed better with more funding, and likely will be performed worse with less funding. So you can’t have a government that monopolizes (or distorts the market for) a certain aspect of health care and simultaneously think that “cutting spending” will have only positive consequences. Less investment by the only provider of a good means less of that good, and that’s not economic growth, nor can it be politically popular.

If you want to reduce the size of government, advocate that certain functions be left to non-government entities. If certain health care functions are not provided by government, those line items in the government budget will be zero, and yet overall “spending” for those items in the economy will not necessarily go down — it will simply be determined by forces other than the governmental budgetary process, i.e., by market processes.

The reason is that “starve the beast” doesn’t work is that the core of the Republican Party is rotten – like Delay and Ney, most of the GOP Congressmen are corrupt and are in politics only for their personal enrichment. Like President Bush, they want to reap the benefits of tax cuts for themselves (and their donors) and pass the costs onto our children and to those who work for a living.

As long as we are foolish enough to vote for the GOP, we deserve the corrupt government we get and the continuing downward spiral of national fortune and image.

We learn in today’s paper that (1) those making their money off passive investments realized large tax cuts averaging $500,000, (2) the lower 80% of the American populace saw their real income drop over the last four years (and consumer spending is coming largely from the profligate top 20% who are tapping into their own savings to keep up the binge), and (3) the “starve the beast” strategy hasn’t worked. I am not surprised by any of this. What we have in America is the emergence of a corporatocracy, melding the interests of big business (and the wealthy) with the government, so that the latter serves the interests of the former as its primary mission. The budget is bigger (and sicker) not because of massive increases in social costs, but because of massive increases in defense spending (much of which goes to military contractors), massive increases in drug spending (with prohibitions on the right of the government to use its purchasing power to reduce the price it has to pay for drugs), and massive straightforward wealth transfers courtesy of huge tax rollbacks for the wealthy.

During the Clinton administration, government spending actually went down by 1.6 percent (I believe I remember the number correctly). In the Bush administration, it has gone up over 2 percent, at the same time as revenues have been cut to give tax cuts to the wealthy. It is impossible to rationalize these realities as expressions of one or more of the principled conservative principles that Bartlett describes. They are, instead, simple evidence of a deepset corruption, engineered by the one constituency that has so obviously benefitted — the corporations and their owners. They care little or nothing about deficits because they would rather finance the debt with other people’s money than keep out of debt by paying with their own money. So deficits will grow, the divide between haves and have nots will grow at an accelerated clip — and millions and millions of Americans will see their American dream dry up and blow away like 1930’s Dust Bowl farmland.

It would have been interesting had Mr. Bartlett continued his historical analysis into the Clinton Administration — I think he would be forced to admit that liberals, rather than conservatives, are now the flag-bearers of responsible governance, whether it be on a high tax/high service or low tax/low service model.

But Mr. Bartlett has it wrong when he says that “in truth [conservatives]have a more noble motivation [than selfish personal interest]—though liberals don’t like it any better. Most conservatives believe that the best way to downsize government is to take away its allowance.”

It’s not clear — at least to me — how downsizing government is per se a “noble motivation.” As some of the commenters above have pointed out, most conservatives are quite selective about which elements of government should be downsized; indeed, in some categories they seem to support continual upsizing. Many also seem to support policies which increase burdens on those least able to bear them (such as consumption taxes). In any case, it’s disingenuous to suggest that conservatives are motivated by anything other than personal self-interest. I know enough candid conservatives who have told me so directly.

Everyone likes to get something for nothing — it’s only human nature. But under the current international monetary/trade regime, it’s simply not realistic to expect our elected officials to behave responsibly when other countries are acting as our enablers. So we may as well live for today — because we know that daddy needs to keep giving us money as much as we need to take it.

1. Corporations and their owners [chief executives]perpetuate the synergistic relationship with corrupt politicians by making large contributions to politicians’ “re-election campaign funds”, wink, wink.

2. Those contributing corporations and CEOs are often paid back with pork. Pork that helps increase the deficit. Hmm, who got the contract to build that bridge to nowhere?

While I completely understand the nuances of what Mr. Bartlett says as well as those in all the preceding comments, I have to say this controversy has always baffled me. The idea of cutting taxes, to starve the beast, to get government under control always struck me as inane.

I’ve spent 25 years managing businesses and have always felt that if I told my board that the only way I would be able to reduce runaway expenditures in my company was to reduce its income, I’d have been murdered before they even had the chance to fire me.

In business we would rebel, yet in politics we accept this bankrupt notion. It doesn’t work. It can’t work.

Here’s what this initiative seems to imply. “We the managers (our elected representatives) admit that we are completely incompetent to manage this company (our nation). One of our most visible and damaging indicators of this is our insistent and irresponsible over spending (Pork. Special Interests. Bridges to Nowhere). We can’t control ourselves and act responsibly in the national interest so to fix it, we voted that we’re going to stop generating income (collecting adequate taxes).” Am I missing something?

Why can’t we come to the obvious conclusion that maybe failed businessmen and millionaire lawyers are not the right class of individuals we want running our business? After all we are the shareholders and owners.

Why do we let the incompetents who run this country, keep telling us that their incompetence is the best we’ll ever get? Talk about the soft bigotry of low expectations!

Could we possibly consider firing them all instead of running our nation out of business? I mean think about it: Could voting every standing incumbent out of office really put us in worse shape than we are now? More to the point, could it possibly deliver us worse leadership?

The most provocative part of Bruce Bartlett’s well-written piece is this: “Most conservatives believe that the best way to downsize government is to take away its allowance, as Ronald Reagan once put it.”

But anyone who gives a child an allowance and also has given the child a credit card is making a big mistake following Reagan’s advice to reduce the child’s spending merely by taking away the allowance. The result surely is this: the child now charges more on the credit card.

And this is exactly the situation when the Republicans cut taxes to try to reduce the money available for spending yet permit unrestricted borrowing. The result is that spending goes on as before, there is a large deficit for the year and a large increase in the government’s debt.

Borrowing of the US government is unrestricted because it has the power to print endless amounts of money and bonds and people the world over accept them. This can’t go on forever. Sooner or later the holders of US money and bonds will start to worry about our ability to pay off these claims. When that happens, there may suddenly be a crisis the magnitude of which can hardly be imagined. The Republicans are playing with fire.

Unfortunately, the nature of our federal system results in every state, including rural states with tiny populations, having the political power that results from having two senators and a minimum of one representative. So we have farm subsidies, military-industrial subsidies, “bridges to nowhere” and other “pork”. When this spending is added to the subsidies to the needy socio-economic classes resulting from the electoral power of large (population) states and cities, the sum is a bias toward excessive spending.

In any case, the only solution to excessive spending is the discipline to spend less. We must elect politicians of strong character.

Bruce Bartlett has seen the light and the scales have fallen from his eyes. Finally. The problem with the Republicans is that they came to power to do good and stayed in power to do well. How many off-budget earmarks were included in this year’s budget?. But it is not enough for him to plead mea-culpa. He was a force in the Republican party and like many others, is at least in part responsible for the fiscal mess we’re in. He should find a responsible Democrat, Hillary, Al Gore, Joe Biden, it really doesn’t matter and work with that person to fashion a responsible economic policy that will propel that individual to the White House in 08. He should help write it but more importantly, help sell it to fiscally conservative Republicans who could get behind it and who are fed up of the lies of the Bush Delay crowd

Bruce, I enjoy reading your blog… its rewarding to see a Clintonian Democrat who identifies as a Conservative, making the same arguments that I do. (I’m a fiscally-responsible liberal who identifies as a liberal.)
However, I disagree with your ultimate conclusion in THIS blog entry, by agreeing with your conclusion in your April 6th entry. The starve-the-beast theory is not “dead as a dodo”… The next president will have to deal with a very, very hungry beast. Even after taxes are raised, services will need to be cut. The incredibly polarizing republicans have stimulated a political environment in which investment in our future is politically inexpedient.

Our country is about to go through some economic hard times. Twenty to thirty years from now, we’ll look back at the Bush presidency as having effectively starved the beast, and shifted the cultural expectations away from shared responsibility, and mutual advancement, to a market that is both free-er from government intrusion, and free-er from individual accountability.

I have spent close to 30 years in federal public service. It is offensive to refer to the U.S. government as “the beast” that must be shrunk down to size. Somehow for some unexplained reason, conservatives and libertarians think it is admirable or virtuous to do this because all government is dangerous and a threat to our liberties and freedoms. Nonsense. The choice is not big vs. small government. We need to have a government that is of an appropriate size. From my experience, government can be a valuable partner with the private sector and a protector of the public good if it is funded adequately to provide the services that Americans need and expect. It is the only power that can level the playing field and protect us from the power of big corporations. Perhaps that’s the real reason conservatives are advocating starving the beast.